Why didn't favored Boeing win Air Force tanker contract?

Air Force tankers like this will be replaced by new Airbus/Northrup Grumman tankers. Senior Airman Jeffrey Allen / U.S. Air Force via Seattle Times

Air Force tankers like this will be replaced by new Airbus/Northrup Grumman tankers. Senior Airman Jeffrey Allen / U.S. Air Force via Seattle Times

WASHINGTON — The question had been whispered up and down Capitol Hill corridors in the days after the Air Force chose a European plane rather than a Boeing one to replace the nation's fleet of aging aerial-refueling tankers.

Rep. Norm Dicks finally asked it.

"Some people are saying Boeing was arrogant, discourteous?" the Washington state Democrat asked Air Force Secretary Michael Wynne.

At congressional hearings over the past two weeks, Wynne and other Air Force officials have defended the $35 billion tanker contract time and again, saying that the competition was fair, open and legal.

But plenty of questions remain unanswered about why Boeing didn't get a contract that it had been heavily favored to win. They include:

Did the Air Force make critical changes in the final bid proposal and a computer model used to evaluate the bids that ended up throwing the contract to Northrop Grumman and the European Aerospace Defense and Space Co., the parent company of Boeing's rival, Airbus?

Did the Boeing Co. misread crucial signals about the contract because of a strained relationship with the Air Force after a 5-year-old procurement scandal that sent two people to jail and led to the resignation of the company's chief executive?

Was Boeing's commercial airplane division so fixated on the sexy new 787 Dreamliner that producing 12 to 15 stodgy old 767s a year for the Air Force became secondary?

Did the Boeing defense team, convinced that it would win, get out-hustled by Northrop-EADS, which according to Air Force officials brought its "A game" to the competition?

Did the Pentagon buckle under pressure from Sen. John McCain, R-Ariz., who demanded that there be more than one bidder even if it meant that the Air Force couldn't consider the estimated billions of dollars in possibly illegal government subsidies that the European plane manufacturer received? And how will McCain's involvement play out as he campaigns for president in states such as Ohio and Michigan, which already have seen jobs exported, and Washington, Kansas and Missouri, where Boeing has plants?

In early summer, the Government Accountability Office will rule on Boeing's protest of the tanker contract and answer some of the questions. Until then, many details remain cloaked in confidentiality or can't be released because they involve proprietary information.

But some answers have emerged.

Boeing, its supporters on Capitol Hill and the defense community were stunned when the Air Force announced that it was awarding the contract for 179 tankers to Northrop-EADS. The contract eventually could be worth $100 billion as the Air Force replaces nearly 600 Eisenhower-era tankers.

Northrop-EADS will use Airbus A330s for its tankers. The A330s are built in Toulouse, France, with major sections manufactured by British, French, German and Spanish companies. The tanker version of the A330 will be assembled at a new plant planned for Mobile, Ala.

Boeing would use its 767, built in its Everett, Wash., plant. Tanking equipment would be added and flight testing conducted at the company's plant in Wichita, Kan.

The 767 is smaller, cheaper to operate and can land in more places closer to combat zones.

The Airbus A330 is newer, larger and can carry more fuel, passengers and cargo.

"The government decided the A330 was more appealing," said Loren Thompson, a military analyst with the Lexington Institute, a defense research center based in Alexandria, Va.

Initially, the Air Force seemed to favor Boeing. Air Force officials told Congress they were looking for a medium-size tanker to replace its KC-135s, which are based on the 50-year-old Boeing 707 jetliner. Cargo- and passenger-carrying capabilities weren't a top priority. Because it was smaller and lighter, the 767 tanker would be able to fly into more air bases in places such as Central Asia, the Horn of Africa and the Persian Gulf.

In issuing its draft request for proposals, the Air Force raised the issue of government subsidies and a pending World Trade Organization ruling. By some estimates, the Airbus A330 and its companion A340 received $5 billion in research and development subsidies — "launch aid" — from European governments.

McCain reacted quickly when he heard that the subsidy issue would be a factor in the competition. He'd been the lead opponent of an earlier $23 billion deal that would have allowed the Air Force to lease up to 100 Boeing 767 tankers. The lease deal collapsed in 2003 amid a major Pentagon procurement scandal.

In a Sept. 8, 2006, letter to Defense Department officials, McCain said he was very concerned about the subsidy issue becoming part of the tanker competition. He said there was no precedent for including it in a procurement competition and that if the Air Force persisted it would "risk eliminating" a competing bid for the tanker.

The subsidy issue was dropped, but Northrop-EADS warned that it might not bid because it thought that the Air Force was still tilting the competition toward Boeing. McCain continued to bang on the Pentagon, telling Robert Gates, then the defense secretary nominee, that cargo and passenger capacity needed to be given a higher priority in order to ensure competitive bids.

Because of the 2003 procurement scandal, Thompson and others said, Boeing may not have had the "back channels" to the Pentagon that it needed to track officials' thinking.

"The procurement scandal had a chilling effect on Boeing's relations with the Air Force, and it contributed to Boeing's lack of understanding of the Air Force (tanker) proposal," Thompson said.

The scandal also opened the door for EADS to pursue the tanker contract. Eager to win a major U.S. defense contract, Northrop Grumman and EADS have spent $70 million on lobbying since 2003, compared with Boeing's $46.5 million, according to the Center for Responsive Politics, which tracks lobbying expenses.

Thompson and others say that Boeing's commercial airplane division was too focused on the new 787 to pay much attention to the tankers.

"The tanker was not as high a priority for Boeing as it was for Northrop-EADS," Thompson said.

As the Pentagon issued its final request for proposals in December 2006, Boeing was increasingly concerned. Barely a month after issuing the request, the Air Force made changes in the model that would evaluate the bids. The changes essentially took away some of the advantages that the 767 had, such as being able to land at smaller bases.

In a March 7, 2007, letter to Air Force officials, Boeing said given that the "changes are clearly intended to accommodate larger aircraft, Boeing is understandably concerned that the changes in the model could appear to unfairly favor Northrop Grumman."

Boeing officials have said the Air Force told them that the changes were made to "accommodate" Northrop-EADS, which was again threatening not to bid.

If the Air Force had wanted a bigger plane, Boeing could have offered its 777. But Boeing officials said the Air Force discouraged them from doing so.

"Northrop-EADS simply convinced the Air Force (that) bigger was an asset rather than a liability," Thompson said.

Boeing officials deny that their relationship with the Air Force was frayed. Instead, they say, the Air Force changed the bid requirements and evaluation models. They also say that both Boeing's commercial airplane division and the defense division were committed to winning the bid.

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